FCA launches investigation into interest-only mortgages

The Financial Conduct Authority has confirmed that it will look at how firms are treating borrowers whose interest-only mortgages are approaching maturity.

The regulator made the announcement in its business plan for the coming year.

The document said: “Around 1.8 million UK home owners currently have outstanding interest-only mortgages (excluding buy-to-let), and many do not have an appropriate strategy to repay them.

“We will look at how firms treat borrowers whose interest-only mortgages are approaching maturity and their ability to ensure these customers are treated fairly.

“This will include those interest-only mortgages that are due to be repaid by 2020 – where borrowers have the least amount of time to find a solution.”

An interest only mortgage is when the monthly mortgage payment only covers the interest owed. Hundreds of thousands of borrowers who took out a loan now face having to pay it back.

They were once the norm in the UK and many were taken out with little thought to how they would be repaid.

The FCA estimates that 600,000 interest-only borrowers will see their mortgages mature before 2020. Of these customers, just under half are expected to have a shortfall, with around a third of these shortfalls expected to be over £50,000.

Currently, the options open to people over 55 reaching the end of an interest-only mortgage with a shortfall are limited as they are often restricted by their age – too old for further borrowing, but too young for equity release.

Many of these people will either have to resort to selling, downsizing, or turning to savings or pension pots. This is despite the fact that many have good incomes and can continue to service a mortgage.

Dean Mirfin, technical director at Key Retirement, welcomed the announcement but warned many borrowers could end up selling their homes to repay their maturing loan when they didn’t have to.

“There are some good examples now of lenders making positive efforts to support and signpost their maturing IO customers who they otherwise cannot help. One example being that of Santander who are already referring customers with interest-only loans for equity release information and advice as a potential solution and we would urge other lenders to follow their lead,” Mirfin said.

“Where lenders have no solution to offer they must have a duty of care to customers of letting them know all their options, be that mortgage or equity release solutions from the wider market. We are actively helping arrange mainstream or lifetime mortgages.

“It is essential, for this first wave of maturities, that banks and other lending institutions take action sooner than later, these customers are the most vulnerable as they have little time to act. We are engaging with a number of lenders to support their range of solutions but sadly not enough. We hope that the FCA’s announcement expedites that progress.”

According to research by over-60s property experts Homewise, one in 10 over-55s UK homeowners are still paying interest-only mortgages and face the prospect of clearing their debt when the deal runs out.

While the majority are confident of clearing the debt, substantial numbers fear they will not be able to. The study shows 17% of interest-only borrowers aged 55-plus – equivalent to 24,300 – admit they will be unable to clear the debt.

The average amount owed by over-55s with interest-only mortgages is around £91,000, with one in seven owing more than £150,000.

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Written by: Houseladder